International Business Machines Corp. (IBM) is trying to avoid the fate of other companies that loaded up on debt to fund acquisitions, saying it will use some of its cash hoard and suspend share buybacks in an effort to prevent downgrades to the cusp of junk.
The company's acquisition of Red Hat, for $33 billion, will be the world's second-largest technology deal ever and will boost IBM's credentials in the fast-growing and lucrative cloud market. The transaction will also take IBM's debt load close to $80 billion, according to Bloomberg Intelligence analysts Robert Schiffman and Mike Campellone. IBM will use cash from its more-than $14 billion pile, as well as debt sales, to fund the deal, it said in a statement announcing the deal Sunday.
Still, those measures didn't allay debtholder concerns about the company taking on more debt. IBM's bonds fell Monday morning, with its $650 million of 4.7 percent bonds due 2046 sliding the most since April as investors demanded more yield. The cost to insure IBM's debt against default for five years jumped 6.6 basis points to 52.125 basis points, the highest since December 2016, according to data provider CMA. S&P Global ratings cut IBM's rating one notch to A and Moody's Investors Service put it on review for a downgrade.
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